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3-30 A gas pipeline manager has determined that he will need a compressor to satisfy...

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Accounting

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3-30 A gas pipeline manager has determined that he will need a compressor to satisfy gas compression requirements over the next five years or 60 months. The unit can be acquired for a time 0 investment of $1,000,000. The cost of installation at time zero is $75,000 and a major repair would be required at the end of year 3 for an estimated $225,000. The com- pressor would be sold at the end of year five for $300,000. The alter- native is to lease the machine for a year 0 payment of $75,000 to cover installation costs and beginning of month lease payments of $24,000 per month for 60 months. Lease payments include all major repair over the term of the lease. The nominal discount rate is 12% compounded monthly. Use present worth cost analysis for annual periods to determine whether leasing or purchasing offers the least cost method of providing service. Verify this conclusion with equivalent monthly cost analysis

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